4 ms·

I mean this as a genuine question: What law would shorting 140% of a company’s stock break?

ESTheComposer 6y ago
Disclaimer: I've been trading for ~8 years but only heavily researching trading strategies ~1 year, so I'm no expert in these things. But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal
- deleted 6y ago
  [deleted]
- smabie 6y ago
  Hate to break it to you, but I can borrow a share and sell it to you and then I can borrow it back over and over again.
  - PeterisP 6y ago
    Perhaps the issue there is that in this scenario (I have a share; you borrow it from me and sell it to me; then you boroow it from me once more and sell it to me again) currently it's treated as if I own three shares (though two of them have marks on them that they can't be lent). Perhaps it should be explicitly treated as if I have one share, and two "claims on shares" which are likely to materialize, but are not guaranteed to do so - to make that distinction clear, to ensure that the lending for a short actually involves the lender temporarily giving up that share instead of just marking it as "used".
- bb88 6y ago
  The number of shares reported is the number of shares existence -- not because of naked shorting or not. Naked shorting would not increase the number of share available to be bought. But not the total number of shares in existence. This is the same way banks use deposits to make loans. The dollar is the same dollar, but can be spent multiple times. Hence the money multiplier effect. The number of dollars in circulation is a constant. The number of times a dollar can be spent can be more than one. At some point the loan still has to be paid off, which requires me, eg, to acquire a dollar somehow, then pay it back to the bank -- with interest.
akhosravian 6y ago
Imagine a world where an individual did all this shorting. A different individual then sees it and buys all outstanding shares of the company, and decides they are long on the company and only want to hold their shares. How does the shorter now settle up their positions in this scenario? With 140% of the company’s stock shorter it becomes easier to get into this state.
- roenxi 6y ago
  What law would that break? It isn't fraud, the individual could still reasonably expect to to be able to fulfil the contracts. Taking big risks with their own money is not illegal.
- Jarwain 6y ago
  Matt Levine talks about something along these lines happening here: https://dealbreaker.com/2012/06/phil-falcones-alleged-piggish-behavior-made-him-some-enemies https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis... The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history: > At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade. > In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.

Disclaimer: I've been trading for ~8 years but only heavily researching trading strategies ~1 year, so I'm no expert in these things. But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal

deleted 6y ago
[deleted]
smabie 6y ago
Hate to break it to you, but I can borrow a share and sell it to you and then I can borrow it back over and over again.
- PeterisP 6y ago
  Perhaps the issue there is that in this scenario (I have a share; you borrow it from me and sell it to me; then you boroow it from me once more and sell it to me again) currently it's treated as if I own three shares (though two of them have marks on them that they can't be lent). Perhaps it should be explicitly treated as if I have one share, and two "claims on shares" which are likely to materialize, but are not guaranteed to do so - to make that distinction clear, to ensure that the lending for a short actually involves the lender temporarily giving up that share instead of just marking it as "used".
bb88 6y ago
The number of shares reported is the number of shares existence -- not because of naked shorting or not. Naked shorting would not increase the number of share available to be bought. But not the total number of shares in existence. This is the same way banks use deposits to make loans. The dollar is the same dollar, but can be spent multiple times. Hence the money multiplier effect. The number of dollars in circulation is a constant. The number of times a dollar can be spent can be more than one. At some point the loan still has to be paid off, which requires me, eg, to acquire a dollar somehow, then pay it back to the bank -- with interest.

akhosravian 6y ago

Imagine a world where an individual did all this shorting. A different individual then sees it and buys all outstanding shares of the company, and decides they are long on the company and only want to hold their shares. How does the shorter now settle up their positions in this scenario? With 140% of the company’s stock shorter it becomes easier to get into this state.

roenxi 6y ago
What law would that break? It isn't fraud, the individual could still reasonably expect to to be able to fulfil the contracts. Taking big risks with their own money is not illegal.
Jarwain 6y ago
Matt Levine talks about something along these lines happening here: https://dealbreaker.com/2012/06/phil-falcones-alleged-piggish-behavior-made-him-some-enemies https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis... The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history: > At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade. > In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.